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Callable bonds on discount and premium

alexvaag12

New Member
Subscriber
Thread starter #1
Hi David,

Is there any relationship regarding a callable bond when the bond is trading at discount or premium? In what cases would the call be triggered? Also, i would like to know this same relationship for duration for those type of bonds.

Thanks!!!
 

Nicole Seaman

Chief Admin Officer
Staff member
Subscriber
#2
Hi David,

Is there any relationship regarding a callable bond when the bond is trading at discount or premium? In what cases would the call be triggered? Also, i would like to know this same relationship for duration for those type of bonds.

Thanks!!!
Hello @alexvaag12

There is a large number of threads in the forum that discuss callable bonds. Because the forum gets so busy right before the exam, please make sure to use the search and tag functions in the forum to see if your question has already been answered. You will see that I added a tag to the top of this thread. If you click on that tag, it will bring up the forum threads that have the same tag. Our search function will also bring up many forum threads discussing this. I've typed callable bonds into the search function, and it brought up all of these threads: https://www.bionicturtle.com/forum/search/54821/?q=callable+bond&t=post&o=relevance . You should be able to find the answers to your questions within those threads.

Thank you,

Nicole
 

alexvaag12

New Member
Subscriber
Thread starter #3
Hi Nicole,

Thanks for the advice! Although i must say i tried this before and found close topics, but non that could answer my specific question.

Thanks!
 

evelyn.peng

Member
Subscriber
#4
Hi Nicole,

Thanks for the advice! Although i must say i tried this before and found close topics, but non that could answer my specific question.

Thanks!
Hi,
I can take a guess to help you with this question:
Callable bonds would be traded at a discount compared to a plain vanilla bond because the embedded call option gives the bond issuer the option of calling the bond back at a fixed strike price.
Callable bonds would theoretically have shorter duration than a vanilla counterpart using the McCauley definition of "timing to cashflow" because the call would presumably end the life of the bond earlier than the vanilla bond. But I think it's more complicated than that, you should read Chapter 20 of Tuckman's Fixed Income Securities textbook.
The most striking feature as it relates to callable bond though is the negative convexity at low yield. At low yield, the call option is worth more, so the price of the callable bond will be worth less compared to a vanilla bond; resulting in the yield curve exhibiting negative convexity.
Evelyn
 
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